CHINA GAS UTILITIES：SJ 传奇盛世网页sfTARIFF CUT OVERHANG REMOVED F

CHINA GAS UTILITIES：SJ TARIFF CUT OVERHANG REMOVED FOR BEHL AND KUNLUN; BUY

时间：2017年08月31日 14:02:21 中财网

On 30 August, the NDRC announced it will cut both gas transmission and city gateprices. Though we are still waiting for a detailed assessment by BEHL/Kunlun,the ShaanJing line tariff cut appears to be largely in line with our current modelassumption （blended transmission tariff of Rmb0.24/cm （excl. VAT） based onNDRC’s announcement （Rmb0.2857/’000km/cm, see the announcement）。 At thesame time, the NDRC also will cut city gate benchmark prices for each provinceby Rmb0.1/cm, or 5-9%. Both price cuts are effective on 1 September 2017. Aswe argued before, we believe the official issuance of SJ line tariff cut removes thebiggest overhang forBEHL （392 HK, Buy） and Kunlun （0135 HK, Buy）， which aretrading at attractive valuations of 7x and 11x 2018E P/E. Reiterate Buy.
　　SJ tariff cut finalized, overhang removed for BEHL/Kunlun
According to the NDRC, the transmission tariff is assessed based on the 8% ROAregulation issued in Oct 2016. As a result, the tariffs for China's 13 transmissionpipelines are cut by 15% on average, effective on 1 September 2017. Specificallyfor the ShaanJing line which is jointly owned by Kunlun （60%） and BEHL （40%），tariff was lowered to Rmb0.2857/'000 km/cm, largely in line with our assumedblended transmission tariff of Rmb0.24/cm （excl.VAT） post the cut effective on 1Oct 2017. We believe it removes the largest overhang of these two companiesgiven SJ line contributes c.45% and 96% FY16 recurring earnings for BEHL andKunlun respectively. Hence, we reiterate Buy on BEHL （TP HKD51.5; CP HKD41.5）as we expect the company to record a 9% earnings CAGR over 2017-19E evenfactoring in such tariff cut （See Unjustified negative value after stripping off stakesin listcos; Buy）。 Besides, we also like Kunlun （TP HKD8.5; CP HKD7.17） due to theimproving outlook of LNG value chain.
　　Rmb0.1/cm city gate price cut slightly positive to gas distributors
Effective on 1 September 2017, the city gate benchmark prices for each provincewill be lowered by Rmb0.1/cm, or 5-9%, mainly to reflect the transmission tariffcut and lower VAT （13% cut to 11%, effective on 1 July）。 We think the city gateprice cut is slightly positive to gas distributors as it may stimulate gas demandand mitigate some distribution margin pressures. We do not expect much delaysfor distributors to pass though the cost savings to end users given more stringentmargin/return regulation by local governments.
　　While on the other hand, a winter price hike is likely to be initiated by oil majorsagain this year given the increasing gas demand seasonality driven by coal-to-gas conversion, and we believe gas distributors could pass -through most of thegas price hikes to end users, similar with last year.
　　Overall, we believe gas distribution margins to decline mildly over 2017-19 but ata much more moderate rate than the 1H17 yoy trends. We prefer ENN （2688 HK,Buy, CP HKD49.85） among pure downstream peers.

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